Company Law

February 8th, 2011

Panamanian commerce is based in one of the world’s few truly service-dominated economies. Industries such as banking, insurance, shipping and transport, "offshore" business and import/re-export account for between 75% and 80% of the GNP and the dynamic of the sector requires constant change. The number of companies registered in Panama –the majority of which deal with the aforementioned services– is approximately 350,000, a number exceeded only by those of Hong Kong, which has close to 400,000.

The reason for the popularity of Panama-based corporations are many. Panama welcomes foreigner investors and has given them the same rights as nationals. The country’s tax structure is favorable and generous incentives are available, especially to operations devoted to export. Taxes are levied only on net income derived from operations within Panama and there are no exchange controls. There are no restrictions on transfer of profits, dividends, interest, royalties and fees, repatriation of capital or repayment of principal. Finally there is the foundation, Panama corporate law, amended only once since 1927, that is extremely conducive to organizing a company within the country for the purpose of directing operations elsewhere.

In terms of the actual opening and maintaining of a business in general, this equates to a relatively simple unrestricted process.

Business licenses

Law No. 25 of August 26, 1994 most recently modified licensing stipulations and licenses are issued through the Ministry of Commerce and Industry. Exempted from licensing are entities conducting business exclusively in certain agroindustrial and handicraft sectors, as are those companies with a startup capital base of under $10,000. There are two standard types of licenses, which must always be visible in the place of business.

The Class A Commercial License applies to commercial and mortgage banks, financial companies, high-technology companies insurers and reinsurers, international financial brokers and transportation companies, mutual funds and public utilities. The Class B Commercial License is mandatory for bars, drugstores, gas stations, real estate agents, representation agencies, restaurant and other retail-oriented businesses. Class B status is only granted to Panamanians or corporations owned entirely by Panamanians since foreign companies are not permitted to engage in retail trade or certain professional activities. The National Securities Commission or the Superintendency of Insurance and Reinsurance must grant special accreditation for specified financial industries.

Forming corporations

Corporate names are certified by the Official Register of National Industry (Registro Oficial de la Industria Nacional). Names can be in any language, but are required to be suffixed with S.A., Inc., Corp. or Corporation.

There are two types of corporations in Panama: resident and non-resident. Two or more individuals or corporations may start a corporation and articles of incorporation may be executed inside or outside Panama in any language. Corporations may be owned by a single individual or corporation and capital does not have to be held by Panamanians. A foreign company is allowed to have branches or subsiduaries in Panama and numerous entities offer the use of shell companies to those requiring them.

The Board of Directors must be composed of at least three directors. Directors can be individual or corporate, national or non-national. A President, Treasurer and Secretary are required and one person can hold more than one of these positions. Directors and officers need not be shareholders and shareholder meetings need not be held in Panama.

All corporations are required to have a Resident Agent (read : Panamanian lawyer or law firm) and only agents can file incorporation documents. Approval is normally granted within one week. Costs vary, but usually fall within the $900 to $1,300 range.

Corporate taxes

Panamanian income tax is meant to be levied only on income derived from sources "within the territory of the Republic", and the 1964 law specifically states that the following activities do not produce taxable income: (1) invoicing from an office in Panama the sales of goods that do not enter the country; (2) handling offshore transactions from an office in Panama; and, (3) distributing dividends from income derived abroad, including income from (1) and (2).

Taxable income is defined as the balance of gross income less deductible expenses. The resident corporate tax rate on income of up to $500,000 is 30%. For over $500,000, the rate is $150,000 plus 34%. Non-resident corporate income is considered to be offshore, but a yearly fee of $150 is levied. For non-resident banking corporations in Panama, income from activities is also tax-free.

Organizational expenses may be excluded from taxable income in the year incurred or amortized over five years, at the discretion of the taxpayer. The total cost of research and development may also be subtracted.

Other considerations

The fiscal year is calculated from January 1 to December 31. Due to the existence of numerous back-to-back holidays, business activity slows down dramatically during the months of November and December.

Business information sources

Those wishing to obtain more information pertaining to establishing a business in Panama may contact: